Should I invest in dividends? This is a question many have asked themselves, but still haven’t answered. There are SO many things to invest in, it can tough to choose which path to take! I never even considered dividends when I began my research into the stock market, because I didn’t even consider dividends to be a viable source of passive income. Here, we will go over if YOU should invest in dividend-paying stocks
1. What are Dividend-Paying Stocks?
Dividend stocks are the same as any other stock. When you purchase a dividend stock, you are purchasing a share of a company. The difference between dividend stocks and growth stocks is that dividends are a different way of payment.
Let’s compare a dividend investment to a growth investment.
Here you see the AT&T stock chart, which is considered one of the best dividend-paying stocks. As you can see, the share price stays pretty close to stagnant, in 5 years there has hardly been any growth. This would typically worry a growth investor, since they rely on capital appreciation. Capital appreciation refers to the share price, and as you can see, AT&T doesn’t have much capital appreciation. They focus their efforts towards dividends.
Here you see Amazon stock, considered by many to be the best growth stock in the market. This chart looks a lot more appealing to the average investor, because the share price continues to grow. However, what is not considered is the dividend payout. Cash is paid out 4 times a year, or 12 times a year. Companies like AT&T rewards investors for investing in their company, and the payment is called a dividend.
Are Dividends Better Than Growth Stocks?
If you look at the charts above, you might say that growth stocks are certainly better than dividends. However, there is a lot more when you examine the stocks themselves. There isn’t one true winner, because it depends on your goals. Dividend vs growth stocks will be another lesson of its own.
Dividends have the benefit of compound interest. There will be a lesson on this as well. You can take advantage of compound with growth stocks as well, but dividends maximize compounding potential. Essentially, money + time = more money. money + time & money = even more money! As you receive your quarterly or monthly payment, you reinvest the money back into the stock. Now, you will get a larger dividend the next payment. Continue doing this, and after a period of time you will be earning MUCH more than you were previously earning!
Growth stocks also suffer more from something called volatility. Volatility means that growth stocks are a lot more unpredictable, and liable to change. This is because growth investors rely on the share price, which is typically a lot less predictable than dividend payouts. Dividends do possess risk, but not as much as a growth stock. Dividend aristocrats and dividend kings give you reassurance that your portfolio will stand the test of time.
- Dividend aristocrats are companies that have consistently raised their dividend amount every year for the last 25 years.
- Dividend kings are companies that have consistently raised their dividend amount every year for the last 50 years.
What are the risks associated with dividend investing?
As a lot of you know, there is always risk in the stock market, as there is risk in most investments that you will make. However, dividends are a fairly safe investment, IF you do your research. I have other articles that discuss how to research, conduct fundamental analysis, and decide if a stock is good to buy! Below you will find a list of the potential risks associated with dividend investing:
- If companies perform poorly, they may be forced to cut their dividend
- Dividends may stop growing as fast
- If you go into dividend stocks without a clear head of understanding, you may lose.
All in all, dividend stocks are a great investment, if it’s great for YOU. It depends on your goals. If you want a large amount of passive income for retirement and you have years before you retire, dividends can be amazing! But if you’re 60 years old, and plan on retiring when you’re 65, dividend stocks may not be the best investment for you. I will also dip into other forms of investing though, so stay tuned!